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Supreme Court permits state enforcement authority over national banks

Recently, the United States Supreme Court, in a 5-4 decision, held in Cuomo v. The Clearing House Association that the Office of the Comptroller of the Currency’s (the “OCC”) regulation purporting to preempt state law enforcement was not a reasonable interpretation of the National Bank Act. The decision is important in the ongoing tension between the attempts of states to assert authority over national banks and in the legislative consideration of President Obama’s attempt to implement his financial regulatory reform plan.

The case stems from letters sent by Eliot Spitzer, then Attorney General for the State of New York, to several national banks requesting that they provide certain non-public information about their lending practices to determine whether the banks had violated New York’s fair-lending laws. The OCC and a banking trade group brought suit to enjoin the information request, claiming that the National Bank Act and the OCC’s regulations preempt any attempt at state law enforcement against national banks. The District Court for the Southern District of New York entered an injunction prohibiting the attorney general from enforcing the state’s fair-lending laws through demands for records and judicial proceedings. The Second Circuit affirmed that decision.

Justice Scalia, writing for the majority, drew a distinction between a state’s “visitorial” powers and its powers to enforce the law. Visitorial powers, he opined, refer to the right to oversee corporate affairs, such as regulation, supervision and examination and inspection of a bank’s books and records. However, contrary to the OCC’s regulations, the National Bank Act preempts only visitorial powers and not the ordinary enforcement of state law through the courts.

The dissent, written by Justice Thomas, contends that the OCC’s interpretation of its regulations that visitorial powers include enforcing compliance with applicable federal and state laws, thereby precluding state enforcement of state laws, should be upheld. The dissent relies on the principle of statutory construction developed in Chevron v. Natural Resources Defense Counsel that provides for judicial deference to an agency’s interpretation of its statute if the statute is ambiguous and the interpretation is reasonable.

The Court’s decision is important for several reasons. The OCC has been aggressive in asserting its exclusive authority over the regulation of national banks and its claims of preemption of state laws, except for state laws relating to property, contracts, zoning, taxation and criminal laws. The courts have historically afforded deference to the OCC’s regulations and interpretations, even when they preempted state law or prevented state enforcement of laws that were not specifically preempted. The decision could lead to increased attempts by state attorneys general to enforce their state laws against national banks through the courts.

Also, this decision may facilitate the implementation of President Obama’s regulatory reform plan. The regulatory restructuring plan proposes the creation of a new federal agency, the Consumer Financial Protection Agency, that would assume the existing authority of the bank regulators with respect to consumer and fair lending laws. Such agency would be vested with the sole authority to promulgate and interpret regulations under existing and future consumer financial services, fair lending and community reinvestment laws. Further, such agency would have supervisory, examination and enforcement authority over all entities subject to its regulations, including state-chartered and national banks. Additionally, the reform plan would permit states to enact stricter laws than the regulations established by the agency and provide states with concurrent authority to enforce the agency’s regulations for its banks with interstate operations. Critics of the regulatory restructuring plan argue that differing state laws would create significant compliance burdens, and then use existing case law to reinforce their position. However, the ruling of the Supreme Court weakens that argument, and the Obama administration can now claim that its reforms do not materially alter the landscape as states already have authority to enforce certain laws over national banks.